FCA: financial firms should reconsider consumer duty monitoring and reporting strategies

The report follows an FCA multi-firm review examining firms’ approaches to outcomes monitoring under the consumer duty. Whilst this report focused on insurance firms, the good and poor practices highlighted are of relevance to all firms.

The review focused on what the FCA term ‘larger insurance firms’. The FCA notes that the duty applies proportionately, and smaller firms may take different, simpler approaches, applying commensurate resource. Outcomes monitoring, however, is a new expectation and a higher standard for firms to meet. The FCA’s review and report makes clear that there is an expectation on all firms to have engaged fully with the requirements and expectations of the rules.

Good practices

The FCA highlighted good practices including comprehensive monitoring. The FCA found that some firms have established a comprehensive approach to monitoring customer outcomes, ensuring that they have a clear definition of what a good outcome looks like and what any foreseeable harms would be. This approach also allows firms to identify metrics and data to track outcomes effectively.

Proactive interventions were also identified as good practice. Firms demonstrated this by carrying out deeper analysis where outliers have been seen, taking proactive steps to investigate and rectify issues identified and tracking the impact on customer outcomes.

Clear identification of targeted data and metrics, defining what is relevant to monitor outcomes, known as target metrics, is also praised. This ‘good practice’ involves the development of testing frameworks and carefully defined tolerances as well as challenge procedures, to help firms develop good insights into customer outcomes across all customer groups.

Poor practices

A significant concern highlighted by the FCA is that some firms are too focused on carrying out the processes rather than focusing on the actual outcomes these processes are intended to yield for customers. The FCA urges firms to move away from such process-oriented approaches and to focus on demonstrating the actual outcomes achieved rather than whether a review has been completed.

The FCA also identified that some firms have narrow data reliance, relying on a particular set of data, such as complaints data, or data that is insufficiently granular to identity outcomes for different groups of customers. In some cases, tolerances have been set at a level where they are unlikely ever to be breached and so it is unlikely ever to lead to any data for the firm to investigate.

Instances of inadequate reporting were also identified by the FCA. These were noted where board or committee reporting lacked depth, with limited insights into actual customer outcomes due to insufficient or poorly analysed data. This leads to an inability for the board or committee to adequately discuss or challenge outcomes.

Throughout its report the FCA demonstrates particular concern with what it sees as a lack of comprehensive insightful data analysis. For instance, relying solely on complaints data places undue responsibility on customers to identify issues, which may not provide a complete view of the customer experience. Similarly, the use of single type data, such as net promoter scores, is insufficient to gauge the full spectrum of customer outcomes. Just as the FCA looks to be a data-led regulator and regularly requests a range of data from firms, it is clear that the FCA expects firms to similarly be data-led, obtaining and analysing a range of data to ensure that good outcomes are delivered to customers.

The report also references two areas previously highlighted by the FCA in its reports on consumer duty implementation which firms should be particularly aware of. 

One is the re-packaging of existing data to meet the monitoring requirements. Whilst firms are able to use existing data they collect, firms should take care to ensure that they have done the work to identify what good outcomes are, what their tolerance levels are, and what data they need to monitor outcomes. If existing data meets this need, then this is fine, but if firms need additional or alternative data, they should be looking to obtain this, ensuring that they are gathering a range of different types of data to give a holistic picture.

The second area highlighted is in relation to ensuring that monitoring picks up on outcomes for vulnerable customers. Identifying vulnerability is not a new area for the FCA and it has been a significant focus of the duty. The FCA notes that it expected to find that firms already had good insights into outcomes for vulnerable customers, but that it did not consistently see evidence of this.

Whenever the FCA repeats concerns it has previously expressed, it is a strong signal to firms to re-examine their own processes to ensure that FCA criticisms are addressed.  We can expect that these two areas are likely to feature on the FCA’s radar for future action and will certainly be aspects that the FCA will want to examine further in its post-implementation work on the consumer duty.